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The business of value investing – Six essential elements to buying companies like Warren Buffett- Charlie Tian 2009
https://bbs.pinggu.org/thread-695143-1-1.html (Page 126-136)
Calculating a true intrinsic value and the value management
阅读到的有价值的内容段落摘录
It is clear why the concept of margin of safety is the reliance on intrinsic value to make investing decisions, and the value of great businesses with wide economic moats is central to the value investing approach. Once we’ve taken those steps and found a business that looks attractive, we next need to determine the intrinsic value of that business, to find out whether an undervalued investment opportunity exists. Intrinsic value is determined by the cash inflows and outflows- discounted at an appropriate interest rate — that can be expected to occur during the remaining life of the business. This definition is painfully simple, but it works. Let’s apply it to a couple of businesses so you can see for yourself. You need to know the business inside and out in order to estimate cash flow growth with a high degree of confidence. The ability to assess the quality and competence of management thus becomes critical. Knowing how management spends company dollars tells you a lot about how much cash the company will produce years down the road. In short, do your due diligence etc., and when you are done, do it again. Calculating intrinsic value is simple and straightforward. It’s having accurate data that’s the difficult part. That’s why Benjamin Graham remarked: “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” That’s also why Warren Buffett, the best investor on the planet, spends a lot of time focusing on businesses with durable competitive advantages, such as the brand value that Coca-Cola offers, or the monopoly - like industry that American Express operates in. They are dominant businesses with consistent long-term earnings power, which adds a layer of certainty when forecasting future cash flows. No matter how much due diligence on a business is performed, all investing requires a leap of faith. Most of that faith is placed in the ability of corporate managers to utilize the assets of the business to maximize shareholder value in an honest and ethical manner. While the ability and competence of management is crucial and should be considered when making any investment, investors should carefully read and understand these quotes from Warren Buffett: Our conclusion is that, with a few exceptions, when management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. You should invest in a business that even a fool can run, because someday a fool will.
Management is important, but a good company is even more important. You will often hear value investors speak volumes on the superb management overseeing the companies that they have invested in, but if you look deeper, I’d imagine you will find that many of these investments are already excellent businesses. Great management at a great business is a home run. If you get both, you will be rewarded many times over if you stick with the investment. Putting a great chief executive officer (CEO) in a great company is like icing on the cake. Such was the case when Roberto Goizueta took the top job at the Coca-Cola Company in 1981. During his time, the Coca - Cola brand became the best - known trademark in the world. Some of Coke’s most famous ad campaigns, such as “Always Coca-Cola” and “You Can’t Beat the Feeling, ”were launched under Goizueta’s leadership. During the 16 years in which Goizueta ran Coke, the total return on Coke stock was more than 7,100 percent. A $10,000 investment in Coca - Cola when Goizueta took the top job in 1981 was worth $ 710,000, including reinvested dividends, in 1997. By all measures, the 1980s and 1990s were destined to be great decades for the Coca-Cola Company. It benefited from the untapped global demand for its product along with a historical bull market in the United States. Nonetheless, no one doubts Goizueta’s magic touch on the fortunes of Coke. While management can make a vital difference, the value of quality management should be subordinate to the quality of the business. One of the fi nest companies in the world, Johnson & Johnson, illustrates the value of the business before the management approach. For over 100 years, Johnson & Johnson has grown its sales and profit by over 10 percent per annum. Clearly, the company
has had more than one management team making acquisitions, creating expansion plans, and developing new products. Some of those management teams were more able and competent than others, yet Johnson & Johnson continued to show progress. To this day, Johnson & Johnson is one of the few companies that has unlimited growth potential with respect to the products it sells. This fact will remain true regardless of who steers the ship. Understand, however, that this doesn’t imply that any run - of - the - mill executive should steer the ship of the company. Incompetent and unethical behaviour can damage a company’s reputation. If the business is weak, this damage can be deadly. But if the business is loaded with strong fundamental economics, ultimately it will prevail.
阅读到的有价值信息的自我思考点评感想
Understanding all the above information helps us to put the management factor in perspective together so we can analyze and discuss the key considerations in assessing the quality of management in a business. The next list is of factors offers the most compelling considerations in “valuing” the management. In no order of importance, when investigating management, investors ought to give serious consideration to:
• Management ownership of stock
• Compensation structure of top management
• Qualifications and experience
• Operating results report card
Not many people would visit a restaurant if they discovered that the head chef was dining elsewhere. The same standard should be applied to our corporate “chefs”. Nothing is more indicative of complete alignment of interest with shareholders than meaningful ownership of company stock. The proper way to determine whether ownership is meaningful is based on percentage of net worth represented by the underlying stock as well as the consideration paid for the stock. Looking at percentage of net worth represented by stock ownership versus percentage of company owned is more meaningful especially when large companies are involved. If an executive is earning $10 million a year running a $100 billion company, owning 0.1 percent ($100 million) of the company can be very meaningful if it represents a significant portion of his or her net worth. Focusing on percentage of net worth represented by stock ownership allows for an apples-to-apples comparison when comparing management at large companies to those from smaller ones. The exception to this rule is if the CEO is a founder or other individual tightly associated with the business. For instance, Warren Buffett, who took over Berkshire Hathaway in the 1970s, owns over 30 percent of the stock. In this instances, substantial portions of net worth and company ownership are involved. How the stock is owned is also worth an investigative look. The reason has to do with stock options, or rights given to company insiders to purchase stock at a predetermined price. Debate abounds regarding use of stock options. Some defend stock options as a motivating incentive that aligns management’s interest with shareholders (increasing the stock price). Others see options as a blank- check way for companies to reward management at the expense of shareholders (diluting the existing shares). Regardless of your viewpoint, what is factually accurate is that options have an asymmetric payoff structure for those who receive them. An executive who receives options benefits tremendously if the company prospers as the stock options become more valuable. If the company performs poorly, the executive is not any worse off because the options expire worthless. It’s a classic case of heads you win big, tails you lose nothing. If the majority of stock owned by insiders is in the form of options that were granted that represent little or no cost to the grantee, don’t ascribe to them the same weight as you would to outright ownership of the stock. It’s much more impressive and confirming of their dedication to the success of the company to see managers make outright market purchases of stock just like any other shareholder. Understanding all of these considerations, look for management that eats their own cooking.
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